At the risk of looking/sounding like some crazed religious fanatic usually seen carrying a sign or proclaiming: “Repent, the end is near,” I shall avoid the word “repent”. To me, the rest of that proclamation appears accurate and reasonable, at least with regard to our economic condition. [Let me explain:] Words: 1896
So says Monty Pelerin (economicnoise.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com and www.FinancialArticleSummariesToday.com has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Pelerin goes on to say, in part:
The U.S. and world economy are near collapse. Sovereign debt, driven by increasingly desperate government interventions, spirals upward at accelerating rates. There is no recovery and there can be no recovery with the debt levels of both governments and citizens.
The Myth of Keynesianism
For a time fiscal and monetary stimulus were undertaken in the hopes that they would enable economies to achieve traction and return to normal growth paths. The political myth of Keynesianism demanded such “conventional” tools be applied. Almost five years into the economic crisis, there has been no recovery, despite trillions of dollars wasted and there can not be one without massive debt liquidation and the redeployment of misplaced capital.
Lip service is still given to the pseudo economics known as Keynesianism. Die-hards like Paul Krugman and other Statists continue to insist it is the answer to a recovery and push for additional interventions. Statists defend this alchemy because it is the source of government growth and power. In applying more of these remedies, the ultimate resolution of the crisis is [not only] deferred but made worse.
Why Do Interventions Continue?
Interventions, primarily in the form of monetary expansion, continue. Many in the political class realize additional stimulus cannot solve the economic problems. The reason for favoring them is not for an economic cure but as a means to continue government spending at its unsustainable levels. Keynesian economics has always been a political rather than economic tool. The pretense otherwise is becoming harder to maintain.
Lance Roberts, commenting on the latest Richmond Fed data, states:
The injections of liquidity into the system were able to drag forward future consumption, a consequence of which we will have to deal with later, in order to keep economic growth in positive territory.
This chart was part of the rationale for Mr. Roberts’ position:
The impact of no QE3, as described by Mr. Roberts, was devastating in July:
Shipments came to a screeching halt declining from 0 to -23 in July while Inventories rose from 9 to 21. Rising Finished Goods Inventories sitting on the shelves is not an economic positive as the build is likely unwanted given the weakness in New Orders. The weakness in orders also leads to decreasing rates of Capacity Utilization which slipped from -4 in June to -16 in July.
What If Monetary Easing Is Not Re-instituted?
Stopping monetary infusions means a downturn in the economy. The Fed will likely announce new stimulus, especially given the political election. The quaint notion of Fed independence and its unwillingness to take policy actions at this stage in an election cycle will be tested and found wanting. The Fed is a creation of Congress and a political animal, just as any other governmental agency. Incumbents, overwhelmingly want the appearance of a good economy in order to enhance their re-election prospects.
Daniel Amerman described the motivations for printing more money:
1. Creating money out of thin air on a massive basis is all that stands between the current state of hidden depression, and overt depression with unemployment levels in excess of those seen in the US Great Depression of the 1930s.
2. It is the weapon of choice being used to wage currency war and reboot US economic growth.
3. It is the most effective way to meet not just current crushing debt levels, but to deal with the rapidly approaching massive generational crisis of paying for Boomer retirement promises.
4. Political survival and enhanced power for incumbent politicians.
Not reinstating some form of quantitative easing (printing money) would quickly reveal the bankruptcy of the federal government. Last year the Fed purchased 61% of treasuries issued. The Fed now has surpassed China (who is attempting to divest) as the largest holder of US debt. Federal funding needs are no less this year and in the future. Without printing, government cannot pay its bills. Tax collections and private capital markets are insufficient to meet the level of spending.
Maturing debt can be retired only with the issuance of new debt. Government spending continues upward, never downward. The political elite of all countries behave as carnival barkers, promising benefits that cannot be delivered and plundering the productive in an effort to continue their failing scam.
As Gerald Celente expressed it (my emboldening):
The entire financial system is under collapse. It’s not about the Greeks; it’s not about the Spanish; it’s not about the Italians; it’s not about the English; it’s not about the Americans; it’s not about the Chinese; it’s about everybody.
Capital pools, the normal source of funding, are not large enough to fund governments’ debt. Sovereigns survive only via the charade of lending to themselves via central bank money creation. The mechanics are made deliberately obscure, but that is all that keeps governments afloat. Central banks, questionable institutions to begin with, are now nothing but counterfeiting operations for governments out of control. Capitalism has devolved into something little different from the central planning that was practiced under the Soviet Union.
As Judy Shelton pointed out:
The problem for the Soviet government was that financing provided by the state-controlled bank was supporting an increasingly unproductive economy—bailing out unprofitable enterprises that had long since quit producing real economic gains that might have raised living standards. The extension of credit to these entities had little to do with merit or potential usefulness.
That description now fits what were once capitalist economies. For these societies the ending will be similar to that of the Soviet Union. Ms. Shelton also commented on the real need for a central bank, as seen by Lenin:
Lenin had been wise about the uses of banks. Shortly before the October Revolution, he wrote: “Without big banks, socialism would be impossible. The big banks are the ‘state apparatus’ which we need to bring about socialism, and which we take ready-made from capitalism.”
The Relationship Between Growth and Debt
As debt increases as a percentage of GDP, economic growth slows. The theoretical basis for this belief is obvious. Debt reflects advanced consumption which means less future consumption in order to retire the debt. Interest payments only exacerbate matters. Both government and private economists tend to ignore this relationship, forecasting future rates of growth independently of the debt burden.
A study by Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff provide empirical support to the drag imposed by debt. Their study showed that when public debt was less than 90% of GDP for at least 5 years growth averaged 3.5% but it went down to only 2.3% per year when public debt was more than 90% of GDP. This is a reduction of 1.2%, or a little more than a third of annual economic growth.
The temporary boost in economic activity in the short term produced by increased debt is a nice by-product, but one that is costly in the long term. Soon, monetary expansion or debt will no longer to provide this temporary diversion. For all practical purposes, the U.S. and Europe have reached this saturation point.
Economies which benefited from the excessive consumption of the past, now stagger under the burden of having lived beyond their means. The siren song of John Maynard Keynes’ short run has played out and we have reached the long run where “we are all dead.”
The fallacy of national income accounting must be noted. It measures spending rather than net worth. Hence profligate nations can look good while they consume the capital provided by earlier generations. High consumption can be achieved by dis-saving and borrowing. Just as your seeming wealthy neighbor with the big house and new cars appeared to be doing well, so can an economy but when your neighbor loses his home and assets because he was in debt beyond his capabilities, his life style looks less attractive. GDP looks good the more people spend, but ultimately the strength of an economy, just like an individual, is measured in net worth. Consuming capital to appear prosperous is a means to ruin.
The time to cure the debt problems via economic nostrums has passed. Our current situation is better understood by simple arithmetic rather than esoteric economic theories.
As Mitch Daniels observed:
Whether one believes in a large, very active government or something more limited, mathematically, the amount of debt we already have and the terrifying rate at which it is accumulating will lead to national ruin
Keynes is gone, but his bromides now threaten the very survival of Western civilization.
Some Hard Data
Most citizens have no idea what their government is doing to them. Recipients (dependents) of government largess understand what they are getting but have little understanding where it comes from. To them, they are entitled to be supported by government. Few understand that government has no “stash,” produces nothing and gains only from plundering the productive. Robbing Peter to pay Paul may buy votes, but it is not an economically viable strategy.
The Ponzi scheme of government has been going on for the last six or seven decades. Like all such schemes, it eventually exceeds its ability to continue. Every country in the world that has adopted the social welfare state model (a polite description of various stages of Socialism) is insolvent and hopelessly indebted to degrees from which they cannot recover.
Desperation on the part of the governing elite is apparent and has been for a decade or so. The death spiral of these democracies is well underway.
- Collapse could occur any time or it could stretch out for some time as a period of stagnation and declining living standards. Japan has managed to extend their misery for about thirty years.
- The U.S., hardly the worst of the lot, is doomed nevertheless because of its profligate government spending and promises. It may not be the first to go belly-up, but neither will it be the last.
To understand how serious its situation is, consider this observation from Ty Andros:
In the United States the government spends more than $31,000 dollar per household per year. ABSURD. Every citizen OWES $440,000 towards the national debt and UNFUNDED entitlements. In order to meet their obligations they plan to attempt to take everything the private sector HAS.
Let this sink in:
A family of four’s share of federal government debt and promises is $1,760,000. This number does not include the debt and unfunded liabilities of state and municipal governments nor does it include the personal debt of the family — mortgages, car loans, credit cards, etc.
There is neither an economic solution to this problem nor is there any other solution. The laws of arithmetic preclude one. Modern economies have reached the point where they have only two options as correctly described by Ludwig von Mises:
There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should:
- come sooner as the result of a voluntary abandonment of further credit (debt) expansion,
- or later as a final and total catastrophe of the currency system involved.
It is just that simple. No political rhetoric or economic policies can alter the outcome.
Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
We are in the latter stages of the debt death spiral where debt and interest payments can only be made by adding more debt. This process has a sure ending. Like the flush of a toilet, the spiral goes faster and faster until it finally ends. [Let me put forth just how serious the problem is.] Words: 431
While many investors want to believe that U.S. treasuries are a safe haven, I will use this article to debunk that myth with plain hard evidence…[to support my contention that] holding U.S. bonds is the worst investment going forward. Words: 500
This short video – on the unsustainability of government spending – should be watched by everyone, including those not yet old enough to vote. It should be shown in every high school and college classroom. Anyone that cannot understand this presentation should not be allowed out without a guardian.
Our civilization would not be able to handle such a transition from an expansionary credit based economy where goods and services were readily available into a paradigm of credit contraction, supply shortages and destitution and this is what is coming. There is no way to prevent it – only to defer it until a later date – and that day will soon be upon us. Words: 590
The outcome of the election of 2012 will [only] determine the rate of speed at which we approach the [financial] cliff [because] neither political alternative is willing to change course, to steer away from the cliff. The cliff is so high that whether we go over it at 200 mph (Obama) or whether we merely slip over the edge (Romney), the end result is the same — fatal for the economy and perhaps our entire political system. It is the fall that will kill us. [This article explains why that is going to be the case.] Words: 1135
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
With the U.S. election just months off, political pressures will mount to favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
Whether our current economic crisis will end with massive inflation or in a deflationary spiral (ultimately, either one results in a Depression) is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family. [Here is my assessment of what the future outcome will likely be and why.] Words: 1441
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
Interest rates have been manipulated to keep them extremely low in an attempt to stimulate the economy but…unless deficits are dramatically reduced…. interest rates will eventually rise and government interest expense will double or triple from the amounts being paid today. That potentially triggers a debt death spiral, where government has to borrow more than otherwise expected. It also raises the credit risk and could ratchet interest rates up again. It has happened to Greece, Portugal, Spain and other European countries already this year and could well happen in the U.S. too. Words: 595
Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign. The question is: when is sooner or later? The purpose of this article is to examine that question. Words: 2600